International Financial Centres After the Global Financial Crisis and Brexit

It has been ten years since the collapse of Lehman Brothers unleashed panic in financial markets, marking the eruption of the global financial crisis that wreaked havoc to economies and societies around the world. An industry of books has emerged, analyzing the causes, mechanisms and consequences of this calamity. The main protagonists of this literature are investment bankers, followed by other finance professionals, including central bankers and hedge fund managers, as well as politicians. Some books consider the crisis as an accelerator of change in the global economic and political order, including the rise of China. Others focus on the need to reform mainstream economics.

There is however an important neglected aspect in this literature. The global financial system that inflicted the crisis on society could not exist without financial centres. The crisis brewed and fermented in the leading financial centres. It spread from New York to London, and through London to Continental Europe and the rest of the world. To fully grasp what happened a decade ago and learn lessons from it, we cannot treat financial centres as a mere background in a drama played out by bankers, politicians and others.

To address the challenge, in the book ‘International Financial Centres After the Global Financial Crisis and Brexit’, just published by Oxford University Press, the editors Youssef Cassis, Professor of Economic History from the European University Institute, and Dariusz Wójcik, Professor of Economic Geography at the School of Geography and the Environment, Oxford University, gather leading financial historians and geographers to investigate how international financial centres have changed in the last decade and how they are likely to change in the near future. Given that the impacts of the crisis cannot be separated from more recent political and technological developments, the book also considers the potential implications of Brexit and fintech.

How have international financial centres changed since the global financial crisis?

As the excesses and abuses that led to the global financial crisis were concentrated in New York and London, the pre-dominant global financial centres, some might have expected that the crisis would trigger their decline. Job losses in the financial industry in New York and London were significant, but they were short-lived, and the two cities recovered quickly in terms of employment, firm revenues and incomes. One reason was consolidation in the financial sector that by and large took place at the expense of smaller financial institutions, often those from smaller cities and towns. New regulation, somewhat perversely, created compliance jobs mainly in financial capitals. In the UK, employment in financial and related services in London is significantly larger than it was before crisis, but in smaller cities and towns, particularly in the North, the sector has been decimated. This is an important channel through which the crisis has deepened regional disparities in the country, fueling a sense of injustice.

Financial centres in the East, with Singapore, Hong Kong, Shanghai and Beijing in the lead have grown spectacularly over the last ten years, but they are still far from challenging the New York – London axis of global finance. Frankfurt and Paris have also recovered, despite the additional impact of the Eurozone crisis, not least due to new employment in regulation and compliance. Even Tokyo experienced growth in financial centre activity, with new initiatives supported by Abenomics and the policies of the new city governor. Of all the financial centres studied in the book, Swiss centres – Zurich and Geneva – fared worst, affected by a major contraction of the large Swiss banks, and the end of banking secrecy. But even in Switzerland employment in financial and related services as a whole has not declined significantly. Overall, if a Martian landed on Earth and compared data on financial centres in 2007 and 2018, s/he would wonder what financial crisis we were talking about. Historians should be less surprised. This is not the first financial crisis that does not change the top of the hierarchy of international financial centres.

What is the likely impact of Brexit on international financial centres?

There is inertia in financial centre development, but there is no guarantee that London will be able to maintain its status as a pre-eminent global financial. From the financial history and geography point of view Brexit has no precedents. Over the last 40 years or so, London has become the financial capital of the European Union and the leading centre globally for trading almost any Euro-denominated financial instruments. Arguably as far as cities are concerned London has become the biggest beneficiary of the European economic integration project, making the UK the world’s largest net exporter of financial and business services. So far, dozens of financial firms announced partial and typically limited scope relocations from London, with main destinations being Frankfurt, Paris and Dublin, followed by Amsterdam and Luxembourg. Whether the trickle turns into a flood will depend among other things on the actual form that Brexit will take and the incentives offered by other financial centres. Our book suggests that New York may benefit, as US firms may move some activities back home, while the impact on Asian financial centres should be marginal.

How is fintech likely to change international financial centres?

New financial technologies, including peer-to-peer lending platforms, blockchain or robo-advisors, known collectively as fintech, are promising to transform the nature of financial services. So far, their influence on financial centres has been far from revolutionary. Despite the expected impact of fintech on decimating jobs, employment in financial and related services in financial centres has grown. Just as in the case of Brexit, however, the potential impact of fintech on financial centres is fundamentally uncertain and should not be underestimated. Government and industry associations in all leading financial centres are racing to attract fintech to their cities, partly as a way to diversify their economic base. Fintech investment is extremely geographically concentrated, with the largest centres in the San Francisco – Sillicon Valley Bay Area, New York and London. As such, while reducing the role of distance in accessing financial services, fintech may increase the concentration of activity and power in the production of these services.

Overall, the last decade has opened a new chapter in the history of international financial centres. Somewhat paradoxically, the main impacts of the global financial crisis on these centres are not necessarily direct, in terms of temporary decline in activity and rise of regulation, but indirect, in the form of Brexit and fintech. In any case, financial centres are here to stay, and remain an important lens to understanding the world economy and capitalism.